RAND PAUL: Here's why we should audit the Fed

U.S. Republican presidential candidate Rand Paul speaks at the Growth and Opportunity Party at the Iowa State Fairgrounds in Des Moines, Iowa.Reuters/Brian C. Frank

Sen. Rand Paul (R-Kentucky) is a 2016 presidential candidate.

It is no secret that the Federal Reserve's unchecked printing press causes recessions and increases income inequality. Allowing the Fed to inflate our money supply will artificially keep interests rates low, but at what cost? Their acts can no longer go unchecked, which is why I am proud to carry forth my father's original 'Audit the Fed' legislation, which will receive a vote in the Senate in early January.

In 2009, Senator Cruz drafted a legal brief praising President Obama's American Recovery and Reinvestment Act, a stimulus bill that increased deficit spending by over $800 billion. In the brief, Senator Cruz argued that the bill's handouts will "directly impact the economy" and "further the greater purpose of economic recovery for America,"

Earlier this month, Cruz then blamed the Great Recession not on the Federal Reserve's artificial lowering of interest rates, but on its failure to continue pushing them down in a timely manner. Cruz said that the Federal Reserve's decision to "[shift] to a tighter monetary policy...set the stage for the financial crisis."

On the campaign trail, Senator Cruz has further demonstrated his unwillingness to rein in artificial credit expansion by repeatedly calling for the Fed to follow "rules-based" monetary policy. This means that he still wants to control the money supply in order to meet the requirements of a mandate or equation.

I couldn't disagree more strongly. No true fiscal conservative should ever support the artificial lowering of interest rates—not in 2008, not now, not ever. Doing so is the equivalent of signing a death warrant for our country's low income earners.

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Former Federal Reserve Governor Kevin Warsh refers to the Fed's easy-money policies as the reverse Robin Hood effect. "If you have access to credit—if you've got a big balance sheet—the Fed has made you richer," he said in an interview. "This is a way to make the well-to-do even more well-to-do."

The reason for this is simple: big banks, corporations, and government entities receive the Fed's newly-created money long before anyone else, and they bid up the prices of goods before the rest of us can get to purchasing them.

The side effect of this uneven distribution of money is painfully apparent to many at the grocery store. Over the past 15 years, the price of white bread has increased by over 50 percent, while the price of eggs has more than doubled. As a more conservative-sounding Texas Senator pointed out in the October GOP debate, the cost of ground beef and electricity have also appreciated significantly, by 115 percent and 60 percent respectively.

As a result of the dovish Fed policies championed by legislators like Senator Cruz and President Obama, the middle class is rapidly shrinking. Although the money stock has increased by 5 billion since 2007, real median household income has declined by over 6 percent. While more than 60 percent of the country was part of the middle class in 1971, the middle class now encompasses only 50 percent of the population—and this drop comes despite the money supply rising by over 10 billion since that time.

Freshly printed $20 bills.
Getty Images

The reason for this is because the newly-created money is disproportionately finding its way into the hands of those in the highest income bracket. From 2009 to 2012, as the money stock increased by over 2 billion, the real incomes of the top 1 percent jumped by more than 30 percent. Over the past four and a half decades, as the money stock increased by over two-thousand percent, the share of adults in the highest-income households has more than doubled. Meanwhile, members of the lowest-income tier now account for one-fifth of the country.

Not only has the Fed's low interest rate policies widened the income gap, they have also resulted in fewer Americans working than at any time since the Jimmy Carter administration. Labor force participation has declined to a measly 62.5 percent of the workforce. As of November, 2015 was on track to have more layoffs than any other year since the Great Recession.

Contrary to what Senator Cruz and President Obama would argue, we don't need to cut interest rates in order to escape recessions. We don't need to choose between reducing income inequality and creating economic stability. Instead, we simply need to begin governing conservatively.

This tactic worked remarkably well for us during the 1920-1921 depression. Then, the Federal Reserve recognized that it inflated too much and for too long. The Fed proceeded to promptly correct its mistakes by decreasing the money supply to raise interest rates. While there was some short-term pain, the crisis was over in no time at all.

Contrast this approach to how Senator Cruz would have handled the Great Recession of 2008. After artificially low interest rates led millions of individuals to overinvest and overproduce in the housing industry, Senator Cruz would have cut rates to zero percent even faster—a recipe for creating more wide-scale malinvestment in other areas.

Since 2009, interest rates have remained at or near zero percent. Also since 2009, automobile production has increased by over 100 percent. Dealerships have stimulated more purchases by offering ridiculously low refinancing deals, similar to the infamous no-money down home loans offered during the Great Recession. As a result, auto loans have increased by nearly $80 billion, 20 percent of which are now given to consumers with credit scores below 620.

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Coincidence? I think not. Like the housing bubble, this investment boom was created by artificially low interest rates, and like the housing bubble, this one will pop sometime in the future.

When push comes to shove, we need to stop feeding the economy with the cheap money that the wealthy all-too-frequently begs for. Our economy will never significantly improve—and income inequality will never appreciably fall —until bureaucrats like Senator Cruz and President Obama begin to accept this point.